Weekly Update: The Chop Fest Continues
Good evening, and welcome to this week’s edition of Stealth Trades!
The chop fest continues. After rising slightly in the first part of the week, the Nasdaq sank Friday to wipe out this week’s gains and then some.
Most of Friday’s selloff was caused by a flight from growth. Stocks that have led the 2023 bull market fell by several percent each.
As I write this an hour before the market closes on Friday, Super Micro Computer (SMCI) is down 7.8% on the day. Nvidia, Broadcom, C3.ai, and the other big names were also down several percent.
As I’ve said many times, it is important to keep an eye on market leadership. There will be 5-10 stocks in any bull market leading the surge. This year, Nvidia (NVDA) has been the clear leader. And right now, it is not healthy.
As I detailed in the August 25th weekly update, the stock began showing signs of topping and that has continued.
In case you missed that email, Nvidia reported better-than-expected earnings and sales numbers on August 23. They also raised guidance and announced a $25 billion share buyback. All of these things should have sent the stock higher.
And initially, it did. NVDA gapped up to open 6.5% higher the following day. But the stock immediately sold off.
This is a clear sign of heavy institutional selling. And when the big guys head for the exits, it’s usually not long before the stock crashes.
Today, NVDA broke another level of support. Even at a 12% discount from its highs, the stock has been unable to entice new buyers.
If we see another day or week of heavy selling – a big drop on above-average volume where the stock closes near the low of the session – that will be the final straw for NVDA, and investors should look out below.
We are currently short this stock in my Alpha Stocks service with a 5% profit and growing.
Not everything is falling, however. Oil and gas stocks, which I highlighted as an area of strength last month, continue to make upward progress.
XPRO, an energy stock we own, made a new 52-week high today.
The uranium market is also very hot. Cameco (CCJ), Nexgen Energy (NXE) and Uranium Energy (UEC) are all soaring.
I wish I owned these stocks. I don’t. But I will be looking for a chance to buy them on a pullback.
In the meantime, here are two stocks setting up for potential breakouts that may be worth a look:
Wayfair (W)
Wayfair is the kind of stock you can make a lot of money on by catching the early move. It has household name recognition, trends well, follows the traditional growth stock stages, and is both large enough to attract institutional investors while still being small enough to deliver triple-digit gains.
The daily chart above may not look like an ideal setup at first glance. But I believe the failed breakout in August was a premature move held back by weak market conditions. The weekly chart below shows the significance of this level over the last two years.
Below is a simple stage analysis of Wayfair stock over the last cycle:
Wayfair bought the branding rights for Bed Bath & Beyond on the cheap when it went into bankruptcy earlier this year. This re-brand could be the fresh start the company needs to jumpstart sales growth and trigger a new Stage 2 uptrend in the stock. I will consider buying on a move above $75 per share.
Root, Inc. (ROOT)
ROOT is an app-based insurance company offering home, auto, and renters insurance in all 50 states. With a market capitalization of just $156MM, it is below the small-cap threshold making this a micro-cap stock.
In other words… It’s small. But it wasn’t always. The company was worth roughly $6 billion when it IPO’d in 2020 – roughly 400X larger than its current valuation.
But the stock is showing serious signs of a turnaround. There was a huge volume breakout in June when shares shot from $6 to $14 in one day. A move that extreme needs to be digested since profit taking is almost guaranteed to weigh on the price over the short term.
After a series of shallowing retracements which I have highlighted on the chart above, ROOT is setting up for a potential breakout higher. I want to see a break of the most recent highs near $12 to give the best odds of success.
If the breakout is valid, it should take off and not look back. Traders could use a 10% stop to give it a little room to work but don’t give it too much rope. This is a volatile stock that can make big fast moves in both directions.
Best wishes for your trading,
